Treasuries Variance Decomposition and the Impact of Monetary Policy

This paper investigates the effect of monetary policy shifts on Treasuries over the last three decades. Using Campbell and Ammer’s (1993) framework, we decompose unexpected excess returns on 2-, 5- and 10-year Treasuries in three components related to revisions in expectations (news) about future excess returns, inflation and real interest rates. We evaluate the impact of conventional and unconventional monetary policy shocks on returns and their components. Our results indicate that expansionary monetary policy shocks are associated with declining inflation expectations and higher Treasuries’ returns.